COMMENTARY No. 42

a CANADIAN SECURITY
INTELLIGENCE SERVICE publication

CHINA IN TRANSITION

April 1994

Unclassified

Editors Note:

Developments in modern China can be characterized in three ways:
enormous, contradictory and rapid. For example, China is going to have to create
approximately 200 million jobs in the next ten years to avoid massive
unemployment. Annual inflation in many provinces in 1993 exceeded 20%, eroding
rural incomes and forcing over 25 million peasant families to leave their farms
for work mostly in the southern coastal cities, in turn creating incredible
pressure on the country's social and economic systems. Numerous peasant revolts,
a rising crime rate, an inequitable tax system and uncertain political
succession after Deng Xiaoping all constitute sources of significant potential
instability.

Yet China's recent economic advances have been spectacular, due in part
to the impressive behaviour of private enterprise initiatives in the villages
and townships; and estimates for fiscal 1994-5 indicate a continued growth rate
at more than double that of any other industrialized country. An enormous labour
pool has led to increased foreign exports, and China's trade balances are
improving, particularly with the West.

As the author here points out, we are witnessing at once an industrial
revolution of unparalleled proportions, the emergence of a so-called
socialist/market economy and the release of forces in the civilian society that
the current régime is finding very difficult to control.

Author: An analyst with the Analysis and Production Branch of
CSIS

Disclaimer: Publication of an article in the COMMENTARY
series does not imply CSIS authentication of the information nor CSIS
endorsement of the author's views.

AT THE WATER'S EDGE (Shui Hu Zhuan)

In June 1993, China was on the brink of an economic and social crisis. The
structural factors pertaining to population and land management, circumstances
associated with political succession and the current economic reforms were all
factors that combined to indicate clearly that another crisis was about to shake
the régime. The phenomenon of illegal immigration (Ren She) since
August 1991 and the recent rash of hijackings are, moreover, symptomatic of the
situation in China.

A turbulent year (Duoshi zhi Qiu)

The 16-point austerity program and other measures adopted by the government
since June and July 1993 have resolved certain urgent economic and financial
problems. The measures adopted have been successful insofar as they seem to
have met the demands of the peasants without nipping economic growth in the bud.
The government is, moreover, preparing to announce new reforms.

Nonetheless, the sword of Damocles continues to hang over the régime.
Under-employment and unemployment remain the régime's two-edged weapon:
an almost inexhaustible source of cheap labour to conquer international markets,
but also a potential source of instability. There are reportedly still close to
80 million people living below the poverty line, according to China's criteria.

Corruption has, moreover, seriously damaged the Party's credibility, but the
absence of a strong and organized opposition, the population's fear of chaos,
the support of the army and economic growth have enabled the régime to
hold its own. The Party must, however, adapt and broaden its reforms if it
wants to avoid a crisis.

THE LEGACY OF DENG XIAOPING: old horses know the way (Laoma Shitu)

China has experienced remarkable economic success since establishing its "open
door" policy and undertaking economic reforms at the instigation of Deng
Xiaoping. According to the IMF and the World Bank, the Chinese economy ranks
third in the world and eleventh in international trade. China's economy is
increasingly affected by market forces (price, production, funding, special
economic zones), and the poverty rate has been steadily decreasing since 1979.

Decline of traditional rites and music (Libeng Yùehuài)

With the reforms under way, the Chinese people have launched a quiet
revolution leading to a modernity that has disrupted traditional Chinese
institutions and ethics (Confucian and Marxist). The reforms may have also
affected what J. Needham, the great expert on Chinese affairs, called the
homeostatic stability of Chinese society. We are, in fact, witnessing the
emergence of a truly New Chinaand such a transformation cannot occur
without some difficult periods.

Pull on a seedling to hasten its growth (Yamiao Zhuzhang)

In January 1992, Deng Xiaoping initiated a program of growth in China. As a
result, China's economy experienced exceptional growth in 1992 (12%) and 1993
(13%) after three years of economic correction and adjustment, which also
coincided with three years of good harvests. This growth was, however, marked
by a very sizeable increase in the money supply, credit, investments and
industrial output.

This situation enabled Chinese industry to meet internal demand, but also
propelled China into its fourth inflationary "crisis" since 1951.
Consumer prices rose by close to 20% in China's major cities, and the cost of
production facilities increased by 38%. Bank deposits fell, purchases of
durable goods increased dramatically and imports overtook exports for the first
time since 1989.

Billions of yuan in the form of "unauthorized" loans were poured
into speculative projects and construction or were used to cover losses and pay
salaries and bonuses. The central government had a difficult time selling its
bonds on the market, and peasants were paid with promissory notes. The value of
the renminbi fell drastically in relation to the US dollar, and the funds
available in the central government's coffers plunged to an alarming level.

Economic upheaval and dissatisfaction in rural areas forced the government
to institute another 16-point austerity program in July 1993; numerous measures
were also adopted by organizations that come under the State Council. Among
other things, these measures made it possible to moderate the economy slightly,
to recover three-quarters of the 100 billion yuan in unauthorized loans and to
ensure that the majority of peasants were paid in cash for the summer harvest.
The yuan also gained ground on the market, and the government forced workers to
buy its bonds.

The government was thus able to resolve (at least temporarily) a number of
urgent problems, and to consolidate (at least in theory) its control over the
anarchical financial system. The austerity program will, however, also have a
negative impact on the economy. Moreover, the government must deal with huge
structural challenges that cannot be resolved in the short term. Like Yugong
who wanted to move mountains, Deng Xiaoping has entrusted this task to the next
generation.

The true face of Mount Lushan (Lushan zhen miànmù)

The Chinese population reached 1.18 billion in 1992 and continues to be an
insurmountable challenge for the Chinese government. Despite the success of the
government's national policy on family planning (decline in the birth rate,
decrease in the number of "unplanned" births and increase in the
number of families with one child), the Chinese population is rapidly
increasing, due in part to a greater life expectancy and a very low infant
mortality rate. In 1992 alone, the Chinese population increased by 13.48
million.

Another important characteristic is the population's distribution over the
territory of China: 20% of the population is found in the northwest and 80% in
the southeast; 26% live in cities and 64% in rural areas. Recent years have
witnessed mass urbanization and migration to coastal cities, where the
fluctuating population is estimated at close to 70 million people. Overall,
urban population has increased considerably in recent years, reaching a level of
more than 370 million in 1992. This increase can be attributed primarily to
urbanization rather than to the birth rate. Since 1982, the number of cities
has increased from 236 to 456 and the number of municipalities (towns) has gone
from 2,664 to 9,322.

The tree prefers calm, but the wind continues to blow (shuyujing er
fengbuzhi)

Economic reforms and market forces have affected population control in China
in terms of work units and place of residence. The cumulative effects of the
population's growth and movements, particularly between cities and rural areas,
in turn exert incredible pressure on the country's economic and social systems,
especially those relating to employment and public security.

RURAL CHINA

China's rural areas have moulded the country's history and overthrown
dynasties. These areas now accommodate close to 900,000,000 people. Deng
Xiaoping's success lay in initiating his reforms in the agricultural sector and
ensuring that the peasants benefited. Agricultural production increased quickly
and became more diverse. The average per capita income of peasants has risen
from 160 yuan in 1979 to 784 yuan in 1992. China is, moreover, fond of
comparing itself to India and stressing that, with only 7% of the world's arable
lands, it is able to feed 22% of the world's population.

Unfortunately, since about 1985, the reforms have been, in part, at the
expense of the peasants, who have been burdened with statutory labour for
projects often unrelated to agriculture. The price-fixing policies for
agricultural (wheat vs rice) and industrial products, including the materials
required for agriculture (pesticides, fertilizers and diesel), have also
penalized the peasants.

Thus, the rate of growth of the peasants' income, eroded by inflation, fell
to below 1% from 1989 to 1991, whereas their income had increased by close to 5%
a year from 1985 to 1988 and by about 15% annually from 1978 to 1984. In
addition, the total income of peasants as a percentage of the national economy
decreased from 42% in 1985 to 36% in 1991. This figure had previously increased
from 18% in 1980 to 48% in 1984. It should also be noted that the difference in
income between cities and rural areas, and between the various rural regions of
China, is steadily increasing.

In some regions, particularly Sechuan, Hubei and Hunan, the peasants
received promissory notes in lieu of cash for their harvests. Peasant families
also had trouble cashing postal money orders sent by relatives working in the
city and were given the excuse that the Post Office had no more money in its
cash. The government recently ordered an end to such practices. In some
regions, it is less profitable to farm. One study on agricultural production
costs in the Suzhou region indicated that wheat was the only lucrative crop and
that it was no longer profitable to cultivate corn, long-grain rice, cotton,
silkworms, soya beans or rapeseed. In fact, it is increasingly cost-effective
for a peasant family, confined to small parcels of land (an average of 8.5 mu
per family, [one mu equals 0.0667 hectares]), to invest or work in secondary or
service industries rather than cultivate the land.

Despite these difficulties, several years of good harvests have enabled
China to accumulate large quantities of grains, in part because they cannot be
sold. These reserves would be sufficient to meet the demand for about six
months to a year, depending on the region. However, the per capita production
of grain has barely increased since 1984.

The amount of cultivated land is steadily decreasing by approximately 12%
since 1950. If the ratio of 8.5 mu per family is correct, this means that the
equivalent of 25 million peasant families have had to leave the farm to work in
industries and in the cities. This situation is partly the result of the
creation of special economic zones throughout China, the number of which varies
from 1,700 to 9,000, depending on the office or ministry concerned. The State
Council recently ordered that 750 of these zones be closed, and more than 250
others may soon suffer the same fate.

The village of the great swamp (Dazexiang)

Anger has spread throughout the countryside and, since last year, there have
been close to 200 demonstrations and riots in at least 11 provinces of China.
The suicide rate among peasants and the uprisings in Renshou in January, and
again in May and June of 1993, have sent a clear message to Beijing. The
situation has become so critical that the central government has had to react by
repealing 37 taxes and 43 types of "contributions" in the form of
money, equipment and statute labour imposed on the peasants. It has also forced
the regions to pay the peasants in cash.

The government has maintained 29 types of taxes to be paid and has promised
to amend 17 others. Although this is a clear improvement, the government
appears to have appreciable difficulty establishing these reforms. Regional
requirements and the ingenuity of local officials will probably lead to the
imposition of new taxes and/or an increase in current ones to make up for the
lost revenue.

The biggest problem continues to be under-employment of the workforce in
rural areas. According to China's Ministry of Agriculture, China currently has
a surplus of about 120 million workers, and this number will increase by another
100 million over the next 10 years. The government's policy is simple: "Leave
the farm, but remain in the country." In practice, this means that about
100 million jobs must be created in agriculture and close to 110 million in
secondary and service industries in the villages over the next 10 years.

In economic theory, this problem might be viewed as a relative advantage.
In fact, since 1978, the enterprises created in the villages and townships have
already absorbed close to 100 million peasants. These businesses, a number of
which have undergone impressive growth, are one of the factors that explain
China's economic success and stability. By expanding its domestic market and
developing its exports, China could perhaps absorb another 100 million peasants
into its economy over the next 10 years. It is, however, difficult to foresee
that the economy will allow the creation of 210 million jobs.

The job market

Reforms have had a very large impact on the urban job market, which is
subject to market pressures and the political desire to make the deficit-ridden
state sector profitable. Non-agricultural urban employment reached 146.79
million in late June 1993, down 1.13 million from the start of the year,
according to China's Statistics Bureau. The government-owned enterprises that
employ over 108 million people have reduced their personnel by 762,000. In
addition, the number of permanent workers fell to 74.3 million, while the number
of contract workers increased by 719,000 for a total of 21.3 million. Close to
12.5 million people have so-called temporary jobs.

Collective enterprises have also reduced their personnel by at least 654,000
during 1993. Private enterprises and those funded by foreign investments have,
however, hired close to 286,000 people. The number of small family businesses
has also increased in recent years and there is now estimated to be more than 15
million such businesses, employing close to 25 million people.

The income of city workers is generally more than twice that of peasants. In
the first six months of 1993, their income (salary, bonuses, commissions,
benefits and subsidies) increased by 21.7%, more quickly than the economy. This
was supplemented by a 23.3% increase in income from a second job, interest on
savings and stock profits. Nevertheless, 31% of state-owned enterprises are
running deficits and are surviving only through government subsidies. In August
1993, the government announced a salary freeze, and if it is unable to control
inflation, there could be an increase in strikes.

Unemployment

Unemployment and under-employment will continue to worsen over the next few
years. Official unemployment in China is estimated at 2.3% (3.6 million people),
although this figure (see below) does not include recipients of various
unemployment insurance benefits. A study by the Ministry of Labour and the
All-China Federation of Trade Unions indicated that the number of unemployed has
increased by 10% over last year, and will continue to climb this fall as
millions of young people join the labour force.

The unemployment insurance system is still in its early stages. In 1992,
340,000 state workers who had lost their jobs benefited from this program.
Their numbers doubled in 1993, reaching almost 700,000 in the first six months
of the year. Some provinces, in particular, Anhui, Hainan, Shandong, Hubein,
Zhejiang and Fujian, and the cities of Shanghai and Tianjin, also have their own
programs for workers outside the state sector. This explains why the official
unemployment rate is so low.

THE STATE AND ITS ROLE IN THE ECONOMY

The state budget

According to Xing Guojun of the Institute of Industrial Economics at China's
Academy of Social Sciences, reforms have had a significant impact on the state
budget and have reduced the state's role in and control over the economy as a
whole. Between 1979 and 1991, for example, the government's revenue as a
percentage of the national income fell from 32.9% to 22.4%; the government's
expenditures as a percentage of the national income decreased from 38% to 23.6%.
The government has also altered its role in the economy. Purchases and
acquisitions as a percentage of total state expenditures went from 93% to 70%,
whereas transfer payments increased by 7% to 30%.

The 1979 Basic Law, the 1982 Constitution and the reforms have also favoured
a transfer of powers to local governments, both in terms of institutions and
areas of intervention. According to Yuan Dong of the Ministry of Finance's
Science Research Institute, this has altered the distribution of financial
resources between the central government and the provinces. The central
government's share of total revenue has been steadily decreasing, falling from
66% in 1980 to 45% in 1989.

The very rapid growth in some provinces has further accentuated this gap.
The central government's share of the gross domestic product apparently fell
from 30% in 1978 to about 15% in 1991. Two Yale graduates, Wang Shaoguang and
Hu Angang, see this as a decline in the power of the central government and
foresee disaster after Deng Xiaoping's death, if the government fails to rectify
the situation.

The government has also initiated reforms that give greater autonomy to the
directors of state-owned enterprises and favour the creation of at least 55
large industrial and financial groups. The powers or the level of autonomy
accorded these large enterprises will have a significant impact not only on the
profitability of the enterprises, but also on the role of the Party and the
state in managing the economy. The success of these reforms could also better
position China to compete on international markets in the future.

Price reform

In 1978, the central government began a series of price reforms that have
gradually transformed the Chinese economy into one that increasingly operates
according to the laws of the market. The government has made selective
adjustments, delegated authority to local governments and applied fixed and "incentive"
pricing policies, depending on the product. Overall, between 60% and 80% of
product prices, depending on the sector, are now set by market forcesan
extraordinary turnaround for a so-called socialist economy.

Inflation recently forced the government to tighten its control over price
fixing. Inflation had attained alarming levels in the cities, reaching 21% in
June and 23% in July in China's 35 main cities (35% in Guangzhou). Prices for
raw materials and other production facilities increased even more quickly. The
success of the government's inflation control policy is of prime importance to
the stability of China.

The deficit: a chronic and spreading malady

With the exception of 1985, the central government has accumulated deficits
every year since at least 1979. In 1992, the state registered a deficit of
23.66 billion yuan, 2.88 billion more than anticipated. The central
government's deficit totalled more than 20 billion of this amount, and is added
to the accumulated deficit of 108 billion yuan. A deficit of 20.5 billion yuan
was recorded in 1993. This amount constitutes only the unfinanced portion of
the deficit. The total deficit in 1992 was actually 90.3 billion yuan,
including 45.5 billion funded nationally and 21.2 billion financed outside
China.

The debt: an evolving cancer

China began to borrow on the domestic market again in 1979 and on foreign
markets in 1981. China's foreign debt totalled $69.32 billion (US) at the close
of 1992, an increase of 14.5% over the previous year. According to the State
Administration Exchange Control, medium and long-term debt amounted to $58.475
billion, whereas short-term debt totalled only $10.845 billion, 15.64% of the
total.

Foreign debt is no longer a serious problem, despite its considerable
increase in recent years, rising from $15.8 billion in 1985 to $69.32 billion in
1992. Foreign debt service is only about 7% and the exchange reserves total
more than $18 billion. In addition, China has diversified its foreign loans in
foreign currencies, and has kept the level of its short-term debt below
internationally acceptable limits. China has also benefited from prime-rate
loans.

The debt's rate of increase has, however, exceeded the rate of economic
growth since 1985. In addition, prime-rate loans are becoming increasingly
rare. Debt repayment also reached alarming levels in 1989 and 1990, totalling
close to $17 billion both years. Finally, the foreign exchange reserves are
declining slightly.

Domestic debt is also increasing very rapidly, reaching 108 billion yuan in
1992. Between 1981 and 1992, the Chinese government apparently issued bonds
worth a total of 160 billion yuan. In 1993, the government issued bonds worth
30 billion yuan and had to force people to buy them.

Taxes

Reforms have led the government to establish a new taxation system for
companies and individuals. This system has apparently enabled the state to
double its revenue from industrial and commercial taxes since 1986, for a total
of 260 billion yuan in 1992. Joint ventures and enterprises funded by foreign
investments paid more than 10 billion yuan to the state.

The current system is also partly responsible for the success or overheating
of the economy since 1992, since it gives state-owned enterprises tax
privileges, particularly on loans and investments. Billions of yuan have thus
been deducted before taxes, thereby depriving the government of substantial
revenue.

The tax system is neither unified nor equitable, and the management and
collection system is deficient. Fiscal fraud is common. For example, in 1992,
151 companies provided 7,200 false sales receipts for amounts totalling 5
billion yuan and 1,377 false tax receipts totalling 749 million yuanand
this is just the tip of the iceberg.

The Tax Administration Bureau estimates that tax evasion cost the state more
than 8 billion yuan in 1992. State-owned enterprises have been ordered to repay
5.47 billion yuan to the government, and almost 54,000 other individual, private
and collective enterprises have been fined. Tax collection is one of the most
dangerous occupations in China. Between 1987 and 1991, more than 12,600
collectors were reportedly beaten and 22 died while exercising their duties.

A unified taxation system for businesses has been tested in several places,
particularly Shenzhen, Hainan, Xiamen, Chongqing and Shanghai, reforms that will
probably serve as a model for a future national taxation system. Establishing
such a system is an enormous challenge, but its implementation could bring order
to the current system, make companies more competitive and, perhaps, help
stabilize public finances. An unequal distribution of taxes between the central
government and the regions could, however, cause tremendous tension.

AN OUTWARD-LOOKING ECONOMY

International trade

The Chinese economy is becoming increasingly international in nature and it
may, therefore, become more vulnerable to outside pressures in the future.
International trade is not, however, the deciding factor in the Chinese economy.
It represents between 7% and 16% of the GNP, depending on the method used to
calculate the actual strength of the economy. China does have a very great
potential to increase its share of the world market. Government attempts to
limit imports, particularly of cars and steel, have not prevented the 1993 trade
deficit from rising to $7.8 billion.

Hong Kong is playing an extensive role in the internationalization of the
Chinese economy, serving as a warehouse and transit point for a large percentage
of China's exports. These exports to Hong Kong, which are then re-exported to
other countries, allow China to deny there is a trade imbalance with its trading
partners. This situation highlights the problem of determining a product's
origin for the purposes of international trade.

The trade deficits of China's main clientsincluding the United States
and Canada since 1989could prompt them to demand that China further open
its market to foreign products or, failing that, impose quotas on Chinese
productsa strategy adopted with Japan and Taiwan with well known results.

Investments

Foreign investments in China increased drastically in 1992 and 1993. The
number of companies financed with foreign capital apparently rose to about
130,000. A considerable discrepancy has, however, been noted between investment
plans and actual investments, and sizeable amounts of capital have been taken
out of China. There are, in addition, increasing numbers of Chinese companies
with stocks and bonds trading on the international market. In 1993, contracted
foreign investment reached $122.7 billion, while utilized foreign investment
reached nearly $37 billion. These represent enormous increases of 76.7% and
91.5%, respectively, over 1992.

Since 1 March 1993, the Chinese government has permitted its citizens to
take up to 6,000 yuan with them when they leave the country. The Chinese money
can be exchanged in Hong Kong and in certain places in Russia and Vietnam. This
is, in a way, the beginning of the Chinese yuan's internationalization. During
the next few years, the government plans to make the yuan convertible according
to international standards.

PUBLIC SECURITY IN CHINA: signs of instability

Despite of the success of the reforms, public security has deteriorated in
several provinces, including Sechuan, Hunan, Jiangxi, Shanxi and Anhui, which
were listed as somewhat unstable in a top secret State Council report made
public in Hong Kong in January 1992. A recent report of the Ministry of Public
Security indicated that, in 1992 alone, there were 540 illegal demonstrations,
480 strikes and 75 incidents in which government and Party offices were
attacked. Another secret report released in Hong Kong indicated that, between
1986 and 1992, the Ministry of Public Security dismantled 1,370 illegal
organizations, including 62 considered to be "hostile forces opposed to the
socialist régime".

Corruption has also increased among government and Party members and is
literally eroding the régime's credibility. Recently, huge scandals
involving senior Party and government officials forced the Party to launch
another national campaign to fight corruption. Between January and July 1993,
there were 95 cases of corruption and misappropriation of funds, each involving
amounts of over 1 million yuan. Between 1988 and 1992, the courts ruled on more
than 101,000 cases and sentenced nearly 78,000 people, including more than
25,000 who were found guilty of embezzling sums in excess of 10,000 yuan and 31
who were guilty of offenses involving amounts of over one million yuan.

Drug trafficking has resurfaced in China. In 1992, authorities seized 4,489
kg of heroin and 2,660 kg of opium. More than 28,000 people were arrested for
drug trafficking in 1992 (18,000 in 1991). In an internal police document
published in Hong Kong in May 1992, the number of drug addicts was estimated at
over 300,000four times higher than in 1989. With the drugs has come an
increase in violent crimes: murders, extortion and armed robbery. In addition,
according to official reports, the number of people carrying the HIV virus has
gone from one in 1988, the year in which the first case was diagnosed, to almost
1,000 in early 1993; 11 of those infected have developed AIDS.

These signs of instability are in keeping with the general trend observed
over the past five years. According to the President of the Supreme Court, Ren
Jianxin, the number of criminal cases (2,016,357) has increased by an average of
nearly 7.9% a year since 1988. More than 750,000 of these cases have been
considered serious and over 1,100,000 criminals have been sentenced.

The official crime rate in China is one of the lowest in the world; however,
the trends seen in recent years and the fact that communities no longer hesitate
to use violence to deal with autocratic local despots are indicative of the
general unrest in China. An official document published in August 1992
estimated the crime rate at 2 per 1000. About a year later, a representative of
the Ministry of Public Security put the rate at between 4 or 5 per 1000.

The army

The ultimate guarantor of stability is the People's Liberation Army (PLA).
During 1994 the Chinese government boosted the defence budget by 20%, the
highest percentage increase since 1979. China's military outlay now officially
accounts for 9.59% of total government expenditures, but the actual figure may
be much higher depending on whether revenues from PLA enterprises are included.
The changes occurring within the PLA in recent years, however, appear primarily
concerned with its external rather than internal role.

In an effort eventually to develop a credible blue water fleet, the navy has
commissioned a new class of destroyer known as the Luhu, a new Jiangwei class of
frigates and new support ships. It is also reportedly building a naval base in
Myanmar (Burma). China's power projection capability has also been advanced by
upgrades to its air force. The PLA has purchased a squadron of 25 long-range
SU27 fighters from the Former Soviet Union (FSU), air-to-air refuelling
technology from Iran, and has built an airstrip in the Paracels, all of which
serve to increase its effective range. China is positioning itself strategically
to become a regional superpower vs a regional power; during 1992, Beijing
entered into a strategic alliance with Iran and Pakistan, forming a so-called
iron triangle. A more outward looking PLA could have significant consequences in
the region should a more aggressive form of Chinese nationalism emerge in the
post-Deng era.

Put the past behind and pave the way for the future (Jìwang
Kailai)

As was so accurately pointed out by Harvey Stockwin in the South China
Morning Post, China's political system is suffering from the "Emperor's
syndrome". Deng Xiaoping's successor will have to wait, even though Deng
no longer occupies a position in the Party hierarchy. But there are already
rumblings within the Party.

In China, succession is essentially a political phenomenon within the Party.
It is based on loyalty to individuals whose ideas and prestige make it possible
to ensure China's development and the Party's survival. This system poses a
problem, not only because of the factions that have traditionally divided the
Party, but above all, because the new generation of leadersalthough better
educated in technical and economic areasdo not yet possess the stature of
Mao Zedong or Deng Xiaoping in order to impose their policies on the bureaucracy
and the army.

The problems involved in reaching a consensus on the economic rate of
growth, prior to Deng Xiaoping's pilgrimage to southern China in January 1992,
and on the economy's state of health before the austerity program was
implemented in July 1993, are indicative of the dissension within the Party and
the government. The success of the economic reforms and the austerity program
could give the régime the necessary prestige, but first the basic
inconsistencies inherent in these reforms will have to be eliminated. It is
clear that the reforms will have to continue, since the régime cannot
afford to procrastinate. The government will quickly have to develop the
macroeconomic tools it needs to better manage the economy and will be forced to
take action to resolve the structural problems that China is now facing.

IMPLICATIONS FOR CANADA

China is changing but the goals and desired conclusion of this transition
have not been clearly articulated by the Chinese government and remain unclear.
It is apparent, however, that the course China undertakes will have implications
for Canada, with respect to our bilateral relations and also on an individual
level amongst the 700,000 Canadians of Chinese ancestry, many of whom have ties
to the homeland.

A structural trade deficit?

Trade between Canada and China has increased considerably since diplomatic
relations were established in 1970. It has, in fact, increased by a factor of
16, although it still represents only a fraction of Canada's total international
trade. Until 1988, the trade balance was always favourable to Canada, but
Canada's share on the Chinese market has decreased in recent years in the face
of international competition. In 1989, Canada registered its first trade
deficit with China.

A new wave of immigration?

Immigration from China will continue to increase over the coming years
because of the uncertainties in that country. The phenomenon of boat people and
illegal workers in the United States, Hong Kong, Taiwan and elsewhere is a
reflection of the serious difficulties facing in China. A serious economic
crisis or another purging of the ranks of the "nomenklatura" could
cause a new wave of immigration, and Canada would be called upon to admit a
large number of these immigrants.

Hong Kong's retrocession to China in 1997 has already caused a sizeable wave
of immigration. Canada accepted more than 130,000 immigrants from Hong Kong
between 1988 and 1992, and this number will continue to climb if China cannot
ensure the territory's peace, stability and security, as well as the level of
autonomy and freedom promised in the Sino-British accord. There are also close
to 97,000 foreign citizens living in Hong Kong, including 19,000 Canadians.

Increased crime?

Crimes in Canada of so-called "Asian" origin have increased in
recent years, along with the increase in immigration. Police forces are,
moreover, concerned by this phenomenon, as indicated in the recent Report of the
Committee on Organized Crime of the Association of Chiefs of Police. This
phenomenon is not new, nor is it racial in nature. It is a "normal"
phenomenon that results, in part, from the expansion of criminal organizations
to markets in countries to which their normal clientele have immigrated. The
individuals involved are a very small minority, as has been the case with other
ethnic groups in the past.

The course China charts to lead it into the next century will have a very
great impact on Asia generally and on Canada. Given the structural problems
China must tackle, a smooth transition is highly improbable. Canada's growing
trade and the various personal and cultural linkages to China maintained by the
significant ethnic Chinese population in Canada ensure that the actions China
undertakes as it better defines its path will affect a significant number of
Canadians. One must look beyond China's impressive growth to truly assess
whether the Party will successfully manage the inherent contradictions of the
socialist market economy while containing dissent and preventing an inexorable
erosion of its powers to the provinces.

OUTLOOK

The political (successions and changeovers of political power) and economic
(plans, restructuring, reforms) cycles have profoundly altered China since 1949.
This country has gone from a totalitarian Maoist régime to an
authoritarian and still Leninist government that is developing a so-called
socialist market economy. We are currently witnessing an industrial revolution
and the emergence of a dual merchant class, with one segment that is
technocratic and born of the Party's mandarinate, and another that is private.
The pursuit of freedom is slowly extending to the economic arena and releasing
forces in civilian society that the régime is finding very difficult to
control.

The state is gradually modifying its role in the economy, but continues to
use administrative and authoritarian measures to try to correct excesses. It is
also passing more and more laws, the application of which is posing immeasurable
problems. Finally, the Party is still in command, but corruption has damaged
its credibility. Many groups with divergent interests are emerging and
developing with or without Beijing's accord.

The implosion of China is not inevitable; China is not the former USSR. The
Party remains united despite internal dissension, and China's economic growth is
real. There is no Chinese Yeltsin, nor any credible and united opposition. The
government is firmly in control of the army and the security forces, and the
ethnic conflicts in Tibet and Xinjiang are isolated and do not themselves
represent a threat to the régime.

But the changes underway and the challenges to be met are so great that it
is reasonable to believe that Chinalike Europe in the 19th and 20th
centurieswill undergo further large-scale, socio-political and economic
crises before the end of the century. The media and experts on China are
already contemplating the possible scenarios. Continuation, overthrow,
transformation or collapse of the régime all figure in these predictions.

The Party

When one speaks of China, the reference is often used interchangeably with
the Party. It is becoming clear that the economic changes set in motion by the
Party are making the utility of defining China in terms of the Party less
meaningful. What is necessary for the survival of the Party is not necessarily
good for the development of the society. Regionalism will play a far greater
role in a future China and the existing fault lines, which generally follow
provincial borders, will be exacerbated by centre / region conflicts.

The Party may attempt to demonstrate its relevance by aggressively
introducing macroeconomic controls to cool down the unprecedented economic
growth of the coastal economies or develop tax régimes to obviate
regional income disparities. Through such a policy the Party could assert its
role in the economic arena; however, any interference by the centre beyond what
is strictly required would not be accepted by the wealthier provinces who now
hold the economic levers in China. The current austerity program seems to
indicate that we may be seeing a "strategic convergence" between what
might be called neo-authoritarianism and neo-conservatism. Be that as it may,
and quite aside from personalities and factions, Chinese-style modernism and
regionalism will continue to play a dominant role after Deng Xiaoping's death.

Should the Party find itself unable to address the key economic issues and
structural deficiencies, it may resort to nationalism to prevent any further
erosion of its power. China maintains territorial disputes with countries on
virtually all its borders. Escalating a border dispute into armed conflict is
one way to distract the population from more fundamental concerns and to counter
centrifugal forces. Encouraging nationalism in a country as diverse as China,
is dangerous and accordingly, would be the final paroxysm of a Party desperately
seeking to revitalize its role and legitimacy. In light of the PLA's efforts to
develop its power projection capability, the spectre of an expansionist China
is, however, conceivable.

The Party must overcome a number of challenges, some historical and some
resulting from its pragmatic desire to develop a socialist market economy. In
formulating a response to these difficulties the Party will be guided by the
imperative of maintaining, as far as possible, its power. The Party has proven
itself flexible but will not willingly allow itself to be broken even at the
expense of economic development or its relations abroad. Within this context
China's current crackdown on dissidents just prior to the debate in the United
States over whether to extend China's Most Favoured Nation (MFN) status clearly
indicates that China is prepared to take positions not anticipated or expected
from a strictly economic perspective.

The views expressed herein are those of the author, who may be contacted by
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